Direct vs company ownership
This is the first in a five part series about using companies to own Portuguese property.
1) Direct vs company ownership
2) Buying an “offshore” company:
White and Black
3) White-listed property companies:
The triangulation trap
4) Why move a company to Portugal
5) Portuguese nominee companies:
the better solution
One of the initial doubts when foreigners contemplate buying Portuguese property is whether to buy directly in one’s own name, or hold the property via a company. If you are purchasing your principal residence, direct ownership is often the best choice. However, if it is a second home, or an investment property, company ownership offers tax advantages that may be very appealing.
For many years, buyers used offshore property companies to achieve tax savings, although many of the practises were “grey” in nature. Due to tax evasion problems, Portuguese legislation was changed in late 2003 and offshore companies now suffer an array of punitive measures, which make them unsuitable.
Today, buyers may choose between non-resident companies registered in another jurisdiction, not on Portugal’s “black-list”, or resident companies domiciled in Portugal.
Loss of control
No government likes to lose control over a piece of sovereign territory, especially when it means giving up tax revenue rights. Those who remember Portugal in the “good old days” will recall that a foreigner could only own one property and had to import the capital to purchase a home through a licence from the Bank of Portugal. Offshore property company ownership was one way around such restrictions.
After joining the European Union in the mid 1980s, these restrictions melted away, but offshore companies grew, not so much to avoid local bureaucracy, but more to avoid 10 per cent transfer tax levies (Sisa), as well as assessment on eventual profits. While capital gains tax (CGT) was theoretically due in Portugal, at the point of sale, the unchallenged confidentiality and lack of specific taxation in these tax havens were sufficient to hide most transactions. Shares routinely changed hands without reporting, thus evading chargeable events.
The current criteria for sanctions, based on the principles of unfair tax competition, are clearly defined in Art. 60º of the CIRC. In general, such measures may take the form of blacklisting, as occurred in 1994 and 2002, or specific action directed towards individual companies.
Still non-resident
While a temporary positive change in status may be achieved via “white-list” migration, the company retains its non-resident status. This means an eventual capital gains tax rate of 25 per cent, two-and-a-half fold what comparable Portuguese companies are required to pay. Even more important, tax assessment remains on an historical basis and there is no opportunity to update the basis for CGT assessment, as exists when moving to Portugal. With Double Taxation Treaties opening channels of information-sharing between tax authorities, specific clauses in these accords confer CGT taxation rights to Portugal on the sale of such non-resident companies.
Market perception
Potential home buyers often have difficulty distinguishing between different categories of offshore companies. That is because they are looking for a solution in Portugal, not a company in a far off land. With the problems surrounding offshore companies in recent years, perspective buyers are now aware that, when they buy a foreign company, they acquire not only the assets, but also all of the cumulated liabilities – a bit like the game of musical chairs when the music stops. Most property buyers just want a new home, not to be taking on someone else’s problem.
Next: Buying an “offshore” company: White and Black
• Dennis Swing Greene is an International Fiscal Consultant for euroFINESCO. Private consultations can be scheduled at our offices in Guia (Albufeira) and Lisbon (Chiado). In the Algarve, call 289 561 333; in Lisbon, call 213 424 210 or e-mail: [email protected]. You can also visit our website at www.eurofinesco.com.
